Offshore Yuan Rises Most in Three Weeks as China Output Expands

The yuan climbed the most in three weeks in Hong Kong’s offshore trading after a report showed manufacturing picked up in May and the central bank indicated it won’t target a weakening of the currency.

The currency snapped a four-day drop in Shanghai after an official Purchasing Managers’ Index released June 1 rose to 50.8 from 50.6 in April. President Xi Jinping said expansion is on a “more stable footing,” the Xinhua News Agency reported May 31. The central bank will not intentionally depreciate its currency to increase competitiveness, People’s Bank of China Governor Zhou Xiaochuan was cited as saying by China Central Television today.

“The official PMI released on Saturday came out significantly better than expected,” said Jonathan Cavenagh, a strategist at Westpac Banking Corp. in Singapore. “That’s giving the yuan a lift today. The jury is still very much out on the medium-term outlook for China.”

The yuan climbed 0.2 percent in offshore trading to 6.1374 per dollar as of 5:17 p.m. in Hong Kong, the biggest gain since May 8, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards gained 0.2 percent to 6.2509.

Investors should buy the offshore yuan against the Japanese yen because the PBOC is one of the few central banks comfortable with a stronger currency, Commonwealth Bank of Australia strategists Joseph Capurso and Andy Ji wrote in a report today.

In onshore trading, the yuan advanced 0.05 percent to 6.1317, according to China Foreign Exchange Trade System prices. It reached 6.1210 on May 27 in Shanghai, the strongest level since the government unified official and market exchange rates at the end of 1993.

One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, fell nine basis points, or 0.09 percentage point, to 1.95 percent.

A report released today by HSBC Holdings Plc and Markit Economics suggested China’s manufacturing shrank in May by the most since September.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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